Nintendo slumps amid pressure to exit hardware on Wii U flop

SAN FRANCISCO - Nintendo is under pressure to consider exiting production of video-game machines after reporting disappointing sales of its Wii U console and forecasting a surprise loss, prompting its stock to tumble.

Nintendo, based in Kyoto, Japan, fell 15 percent to 12,445 yen, the biggest intraday plunge since 2011, at 9:34 a.m. in Tokyo trading. The company on Jan. 17 projected an operating loss for the year ending in March, and cut its forecast for annual sales of the year-old Wii U by more than two-thirds.

President Satoru Iwata should concede defeat with the Wii U, shut down production and open up Nintendo's iconic software characters such as Zelda and Super Mario to the smartphones, tablets and consoles that have made a shambles of his strategy, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. Nintendo should exit hardware altogether, Pachter said.

Iwata "has to take responsibility for the Wii U missing the mark," Pachter said. "He will be under pressure to make dramatic changes. If he can do so while remaining in charge, more power to him, but they need to make some changes."

Iwata, 54, says he's not going to step down and plans to see the company through its unspecified transition. To date, he has refused to offer Nintendo franchises for competing console systems or mobile devices. He said on Jan. 17 he's considering changing the business model, without offering specifics.

"Given the expansion of smart devices, we are naturally studying how smart devices can be used to grow the game-player business," Iwata said at an Osaka press conference. "It's not as simple as enabling Mario to move on a smartphone."

Tying Nintendo's iconic characters to its hardware helped boost demand for the original Wii, which sold more than 100 million units and became the world's best-selling console.

This time delays in its own titles hurt the Wii U's sales. The console's failure in the marketplace is dragging down its higher-margin software sales. The company, which had projected a 100 billion-yen ($959 million) operating profit for the fiscal year, now forecasts a 35 billion-yen operating loss.

Nintendo on Jan. 17 lowered its annual sales forecast to 2.8 million Wii U units from 9 million, and halved its projection for game sales for the system to 19 million units. The company cut its forecast for the 3DS handheld player by 25 percent to 13.5 million units, a drop from a year earlier.

The casual gamers who made Nintendo the leader of a $93 billion industry have abandoned standalone systems like Nintendo's 3DS and the Wii U for cheap downloads they can play on an Android phone or an Apple Inc. iPad. New, faster consoles from Sony Corp. and Microsoft Corp. ran away with the hardcore players still willing to plunk down $400 or more for a machine and $60 for a title like "Call of Duty."

Even at $300, Wii U is doomed because it's not popular enough for outside developers to make games for, said Ben Bajarin, an analyst with consulting firm Creative Strategies Inc.

"They need to go back to the drawing board to reinvent themselves," Bajarin said in an interview. "The Wii U didn't move the needle in gaming, so they need to rethink the value of tightly integrated hardware, software and services."

Iwata should focus on delivering Nintendo's iconic characters to mobile devices and the PlayStation and Xbox consoles, Pachter said. Both the Wii U and 3DS handheld take advantage of touchscreen controls to play many Nintendo games, which would make it easier for the company to deliver versions of its games for smartphones and tablets, he said.

With more than 1.5 billion smartphones in consumers' hands, Nintendo could release 10 games a year from its library of 1,500 titles, charge $5 to $10 per mobile game, and sell at least 50 million copies of each to a core Nintendo audience, Pachter said. These products alone would generate $2.5 billion to $5 billion a year in high-margin sales without the expense of making hardware.

On top of that, Nintendo could keep releasing more expensive titles for consoles, Pachter said. He pointed to the approach taken by game publisher Electronic Arts Inc., which is offering "Plants vs Zombies" on multiple platforms.

EA sells a 99-cent version for the iPhone and will offer its latest "Plants vs Zombies: Garden Warfare" as an Xbox exclusive, charging $30 for the Xbox 360 and $40 on the Xbox One.

Making the transition to software maker from console hardware isn't without risk. Sega Corp., once a leader in video- game consoles, ended production in 2001 and is now part of a company that also makes Pachinko machines and operates amusement parks, Sega Sammy Holdings Inc. Atari Inc., the video-game pioneer that developed "Pong," filed for bankruptcy protection last year seeking independence from its French parent, Atari SA.

In its most recent fiscal year, Nintendo generated the equivalent of $2.9 billion in software revenue and $4.8 billion in hardware, according to data compiled by Bloomberg. The company had 845 billion yen in cash, near-cash and short-term investments as of Sept. 30 and no long-term debt, giving Iwata a cushion to develop a new strategy.

Nintendo American depositary receipts fell 17 percent to $14.90 on Jan. 17 in New York, their biggest decline since September 2001. Each ADR equals 0.125 underlying shares. The shares last year advanced 54 percent in Tokyo trading.

While Pachter recommends exiting the hardware business altogether, making even a temporary shift would buy Iwata time to develop a new console that leapfrogs Microsoft and Sony in three years.

"Nintendo's console side is broken,' Pachter said in an interview. "They're not even an also-ran there, they just don't matter."